This week we have a guest post by Matthew Reinhard, Member at law firm Miller & Chevalier
The tale of hand-bag mogul, turned Azerbaijan oil-speculator, turned felon, Frederic Bourke came to an end in mid-December when the Second Circuit Court of Appeals sustained his conviction on conspiracy to violate the Foreign Corrupt Practices Act (“FCPA”) and other charges. The next day the trial court denied Bourke’s motion for a new trial and ordered that he surrender himself to Federal Marshals on January 3, 2012 to begin serving a year and a day sentence in the federal penitentiary.
Bourke’s legal problem arose from a far-reaching private investment scheme designed to purchase and privatize the national oil company of Azerbaijan — SOCAR. Though the focus of much of this case has been on Bourke and the leader of the investment scheme Viktor Kozeny — the so-called “Pirate of Prague” (who has, to date, fended off attempts extradite him from the Bahamas to the United States to face charges) –the case also touched the hedge fund world. Clayton Lewis, a former partner at the Omega Advisors, Inc. hedge fund, pled guilty to FCPA charges arising from Omega’s investment in the scheme, but has yet to be sentenced as the Government still hopes to use him as a testifying witness against Kozeny if and when he is extradited. Omega, for its part, avoided criminal prosecution, but did agree to a civil forfeiture of $500,000.
In upholding his conviction, the Court of Appeals found the trial court correctly informed the jury it could find Bourke guilty of conspiring to violate the FCPA if it believed he “consciously avoided” gaining knowledge of the corrupt scheme. In rendering its decision, the Court emphasized that Bourke knew he was doing business in a country with a reputation for corruption (Azerbaijan) and that Kozeny — who was leading the investment syndicate — had a reputation for corrupt dealings (Kozeny). This decision only reiterates the importance of conducting anti-corruption due diligence of potential business partners, especially on deals involving countries with a reputation for corruption.
While the scope and details of such due diligence efforts may necessarily vary from deal to deal, the basics can oftentimes be integrated into existing due diligence modules. In general, due diligence efforts directed at potential partners should be focused on discerning the reputation of the investor and determining whether the potential-partner has any business or family ties with foreign government officials that could present FCPA risks. This may include asking the potential partner to answer detailed questionnaires, vigorously checking business and credit references, checking the partner against U.S. government and international “blacklists”, and personal interviews between the hedge fund manager and key personnel of the potential partner.
The bottom line take-away from the travails of Frederic Bourke, Clayton Lewis, Omega Advisors and their dealings with the Pirate of Prague, is that the U.S. government expects sophisticated investors to know their partners and recognize the risks of investing in markets with a reputation for corruption. The U.S. government and the courts have made clear that investors who fail to undertake robust due diligence or who knowingly chose to partner with unsavory advisors risk prosecution under the FCPA.
Miller & Chevalier is recognized as having one of the pre-eminent FCPA and international anti-corruption practices in the United States. For more than 20 years, our team has advised U.S. and non-U.S. businesses in every aspect of anti-corruption and FCPA issues. Since 2006, Miller & Chevalier lawyers have made more than 100 visits to over 35 different countries on five continents, including China, Russia, and several countries each in Africa, Latin America, the Middle East, and South East Asia, in connection with FCPA investigations and compliance assessments.